Russia FX Beat - January 15, 2018

> Today's focus. Breaking key levels - UST 10y through 2.5%, 2y at 2%, DXY approaching 90, oil at $70/bbl. US holiday today.
> Global trigger: DXY through 90. The dollar is under concerted pressure, with EUR/USD trading up through 1.22 and DXY today breaking below its lowest level last year and to a three-year low. This index looks primed for a move toward 90.
The dollar depreciation is happening despite the fact that US yields are pushing upwards, which would ordinarily be supportive of the dollar. For example, last week the UST 10y punched up through 2.50% while the 2y has reached 2%.
This week is relatively quiet for news flow, especially today, which is a holiday in the US. For the remainder of the week, 4Q earnings from US banks will be monitored. In terms of economic data, the US sees industrial production on Wednesday and consumer sentiment on Friday.
> Bottom line. Although we think the dollar has weakened enough recently, it has broken below some key levels, which warns of further losses. Today's US holiday might limit its decline, but EUR/USD may hold above 1.22.
> Regional trigger: Russian sovereign CDS lowest since 2008. The starting point for Russian assets this week is a Brent oil price set to push above $70/bbl - it traded briefly above this level overnight for the second time in recent days.
What is interesting, however, is that since Russian markets reopened last week, the ruble has lagged the gains put on by other EM FX. This is despite the ruble playing "catch-up" with EM gains in the first week of the year and oil prices pushing higher. We surmise that anxiety regarding the report due at the end of the month on the feasibility of new US sanctions on Russia is holding the ruble back. On top of this, daily FX purchases of $265 mln are a headwind to the ruble.
Despite the nervousness around sanctions, Russia's 5y sovereign CDS spread continues to fall and is currently under 110 bps. This is below its level prior to the Ukraine crisis in 2014 and is in fact the lowest since just before Lehman in 2008. This is quite remarkable and a nod to the credibility Russia has built with investors through its stable and transparent fiscal and monetary policies.
> Bottom line. From a technical standpoint, there is little to prevent USD/RUB heading toward 56 over the coming days. But such a level might prove a decent one at which to buy dollars.